REPUBLIC SERVICES, INC. You should read the following discussion in conjunction with the unaudited consolidated financial statements and notes thereto included under Part I, Item 1, and the risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Disclosure Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking information about us that is intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Words such as "guidance," "expect," "will," "may," "anticipate," "plan," "estimate," "project," "intend," "should," "can," "likely," "could," "outlook" and similar expressions are intended to identify forward-looking statements. In particular, information appearing in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. These statements include information about our plans, strategies, expectations of future financial performance and prospects. Forward-looking statements are not guarantees of performance. These statements are based upon the current beliefs and expectations of our management and are subject to significant risk and uncertainties that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot assure you that the expectations will prove to be correct. Among the factors that could cause actual results to differ materially from the expectations expressed in the forward-looking statements are the effects of the COVID-19 pandemic and actions taken in response thereto, as well as acts of war, riots or terrorism, and the impact of these acts on economic, financial and social conditions inthe United States as well as our dependence on large, long-term collection, transfer and disposal contracts. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedDecember 31, 2019 , particularly under Part I, Item 1A - Risk Factors, and Part II, Item 1A of this Quarterly Report on Form 10-Q. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, or to assess the impact such risk factors might have on our business. We undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Recent Developments InMarch 2020 , theWorld Health Organization declared the outbreak of a new strain of coronavirus (COVID-19) a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The full extent of the impact of the COVID-19 pandemic on our operations and financial performance will depend on future developments, including the duration and spread of the pandemic, all of which are uncertain and cannot be predicted at this time. An extended period of economic disruption associated with the COVID-19 pandemic could materially and adversely affect our business, results of operations, access to sources of liquidity and financial condition. Both national and local government agencies have implemented steps with the intent to slow the spread of the virus, including shelter-in-place orders and the mandatory shutdown of certain businesses. During this time, we continued to provide essential services to our customers. Inmid-March 2020 , certain customers in our small- and large-container businesses began adjusting their service levels, which included a decrease in the frequency of pickups or a temporary pause in service. In addition, we experienced a decline in volumes disposed at certain of our landfills and transfer stations. As service levels decreased, we also experienced a decrease in certain costs of our operations which are variable in nature. This decline in service activity peaked in the first half of April and gradually improved thereafter as local economies began to gradually reopen and customers began to resume service. The demand for our environmental services business depends on the continued demand for, and production of, oil and natural gas in certain shale basins located inthe United States . During the six months endedJune 30, 2020 , the value of crude oil and natural gas declined to historic lows, resulting in a decrease in rig counts and drilling activity that led to a year-over-year decrease in revenue from our environmental services business. Further declines in the level of production activity may result in an unfavorable change to the long-term strategic outlook for our environmental services business that could result in the recognition of impairment charges on intangible assets and property and equipment associated with this business. On at least a quarterly basis, we will continue to monitor the effect of the evolving COVID-19 pandemic on our business and review our estimates for recoverability of assets used in certain of our operations that are related to strategic investments. 29 -------------------------------------------------------------------------------- Table of Contents InApril 2020 , we launched our Committed to Serve initiative, which was intended to help our employees, customers and communities acrossthe United States . We committed$20 million to support frontline employees and their families, as well as small business customers in the local communities where we serve. In addition to this initiative, we have experienced an increase in certain costs of doing business as a direct result of the COVID-19 pandemic, including costs for additional safety equipment and hygiene products and increased facility and equipment cleaning. These costs, which we refer to as business resumption costs, are intended to assist in protecting the safety of our frontline employees as we continue to provide an essential service to our customers. We also incurred incremental costs for expanding certain aspects of our existing healthcare programs and guaranteeing certain frontline employees a minimum hourly work week regardless of service decreases. During the three and six months endedJune 30, 2020 , we incurred costs of$31.0 million and$34.2 million , respectively, as a direct and incremental result of the COVID-19 pandemic. We expect to incur similar costs throughout 2020, and potentially into future years. The magnitude of the costs we expect to incur throughout the remainder of the year cannot be predicted at this time due to the various uncertainties surrounding the pandemic (e.g., its duration and spread). The effects of the COVID-19 pandemic on our business are described in more detail in the Results of Operations discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Republic is the second largest provider of non-hazardous solid waste collection, transfer, disposal, recycling, and environmental services inthe United States , as measured by revenue. As ofJune 30, 2020 , we operated facilities in 41 states andPuerto Rico through 339 collection operations, 213 transfer stations, 190 active landfills, 78 recycling processing centers, 7 treatment, recovery and disposal facilities, 12 salt water disposal wells and 4 deep injection wells. We are engaged in 75 landfill gas to energy and renewable energy projects and had post-closure responsibility for 130 closed landfills as ofJune 30, 2020 . Revenue for the six months endedJune 30, 2020 decreased by (1.3)% to$5,008.3 million compared to$5,075.9 million for the same period in 2019. This change in revenue is due to decreases in volumes of (3.7)%, fuel recovery fees of (0.5)%, and environmental services of (0.7)%, partially offset by increases in average yield of 2.7%, and acquisitions, net of divestitures of 0.9%. The following table summarizes our revenue, expenses and operating income for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars and as a percentage of revenue): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue$ 2,454.4 100.0 %$ 2,605.3 100.0 %$ 5,008.3 100.0 %$ 5,075.9 100.0 % Expenses: Cost of operations 1,468.1 59.8 1,617.0 62.1 3,018.2 60.3 3,123.1 61.5 Depreciation, amortization and depletion of property and equipment 254.4 10.4 251.0 9.6 508.2 10.2 489.8 9.7 Amortization of other intangible assets 5.2 0.2 5.0 0.2 10.5 0.2 9.7 0.2 Amortization of other assets 9.5 0.4 8.2 0.3 19.0 0.4 16.3 0.3 Accretion 20.8 0.8 20.5 0.8 41.7 0.8 40.9 0.8 Selling, general and administrative 262.1 10.7 264.5 10.1 539.2 10.8 530.9 10.4 Withdrawal costs - multiemployer pension funds 31.6 1.3 - - 35.9 0.7 - - Loss on business divestitures and impairments, net 5.3 0.2 0.2 - 1.4 - 0.5 - Restructuring charges 2.2 0.1 1.5 0.1 6.0 0.1 4.5 0.1 Operating income$ 395.2 16.1 %$ 437.4 16.8 %$ 828.2 16.5 %$ 860.2 17.0 % Our pre-tax income was$300.1 million and$622.7 million for the three and six months endedJune 30, 2020 , respectively, compared to$328.6 million and$641.4 million for the same respective periods in 2019. Our net income attributable toRepublic Services, Inc. was$225.5 million and$471.8 million for the three and six months endedJune 30, 2020 , or$0.71 and$1.47 per diluted share, respectively, compared to$251.5 million and$485.7 million , or$0.78 and$1.50 per diluted share, for the same periods in 2019, respectively. 30 -------------------------------------------------------------------------------- Table of Contents During each of the three and six months endedJune 30, 2020 and 2019, we recorded a number of charges, other expenses and benefits that impacted our pre-tax income, net income attributable toRepublic Services, Inc. (net income - Republic) and diluted earnings per share as noted in the following table (in millions, except per share data). Additionally, see the Results of Operations discussion of this Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of other items that impacted our earnings during the three and six months endedJune 30, 2020 and 2019. Three Months Ended June 30, Three Months Ended June 30, 2020 2019 Net Diluted Net Diluted Pre-tax Income - Earnings Pre-tax Income - Earnings Income Republic per Share Income Republic per Share As reported$ 300.1 $ 225.5 $ 0.71 $ 328.6 $ 251.5 $ 0.78 Restructuring charges(1) 2.2 1.6 0.01 1.5 1.1 - Loss on business divestitures and impairments, net (1) 5.3 6.4 0.02 0.2 0.2 - Acquisition integration and deal costs (2) 1.8 1.3 - 1.9 1.3 0.01 Withdrawal costs - multiemployer pension funds 31.6 23.4 0.07 - - - Total adjustments 40.9 32.7 0.10 3.6 2.6 0.01 As adjusted$ 341.0 $ 258.2 $ 0.81 $ 332.2 $ 254.1 $ 0.79 (1) The aggregate impact to adjusted diluted earnings per share totals to less than$0.01 for the three months endedJune 30, 2019 . (2) The aggregate impact to adjusted diluted earnings per share totals to less than$0.01 for the three months endedJune 30, 2020 . Six Months Ended June 30, Six Months Ended June 30, 2020 2019 Net Diluted Net Diluted Pre-tax Income - Earnings Pre-tax Income - Earnings Income Republic per Share Income Republic per Share As reported$ 622.7 $ 471.8 $ 1.47 $ 641.4 $ 485.7 $ 1.50 Restructuring charges 6.0 4.5 0.02 4.5 3.3 0.01 Loss on business divestitures and impairments, net (1) 1.4 3.5 0.01 0.5 0.4 - Acquisition integration and deal costs 5.6 4.1 0.02 2.5 1.8 0.01 Withdrawal costs - multiemployer pension funds 35.9 26.5 0.08 - - - Bridgeton insurance recovery (10.8) (8.2) (0.03) - - - Incremental contract startup costs - large municipal contract (1) - - - 0.7 0.5 - Total adjustments 38.1 30.4 0.10 8.2 6.0 0.02 As adjusted$ 660.8 $ 502.2 $ 1.57 $ 649.6 $ 491.7 $ 1.52 (1) The aggregate impact to adjusted diluted earnings per share totals to less than$0.01 for the six months endedJune 30, 2019 . We believe that presenting adjusted pre-tax income, adjusted net income - Republic, and adjusted diluted earnings per share, which are not measures determined in accordance withU.S. GAAP, provides an understanding of operational activities before the financial impact of certain items. We use these measures, and believe investors will find them helpful, in understanding the ongoing performance of our operations separate from items that have a disproportionate impact on our results for a particular period. We have incurred comparable charges, costs and recoveries in prior periods, and similar types of adjustments can reasonably be expected to be recorded in future periods. Our definitions of adjusted pre-tax income, adjusted net income - Republic, and adjusted diluted earnings per share may not be comparable to similarly titled measures presented by other companies. Further information on each of these adjustments is included below. 31 -------------------------------------------------------------------------------- Table of Contents Restructuring charges. In 2019, we incurred costs related to the redesign of certain back-office software systems, which continued into 2020. During the three and six months endedJune 30, 2020 , we incurred restructuring charges of$2.2 million and$6.0 million , respectively, and during the three and six months endedJune 30, 2019 , we incurred restructuring charges of$1.5 million and$4.5 million , respectively, that primarily related to these efforts. During the six months endedJune 30, 2020 and 2019, we paid$6.2 million and$6.5 million , respectively, related to these restructuring efforts. InJuly 2020 , we eliminated certain positions, primarily related to our back-office support functions, in response to the COVID-19 pandemic. During the remainder of 2020, we expect to incur additional restructuring charges of approximately$15 million primarily related to employee severance costs and the redesign of certain of our back-office software systems. Substantially all of these restructuring charges will be recorded in our corporate segment. Loss on business divestitures and impairments, net. During the three and six months endedJune 30, 2020 , we recorded a net loss on business divestitures and impairments of$5.3 million , which included a$10.8 million liability for a withdrawal event from a certain multi-employer pension plan, and$1.4 million , respectively. During the three and six months endedJune 30, 2019 , we recorded a net loss on business divestitures and impairments of$0.2 million and$0.5 million , respectively. Acquisition integration and deal costs. Although our business regularly incurs costs related to acquisitions, we specifically identify in the tables above integration and deal costs of$1.8 million and$5.6 million incurred during the three and six months endedJune 30, 2020 , respectively, and$1.9 million and$2.5 million incurred during the three and six months endedJune 30, 2019 , respectively. We do this because of the magnitude of the costs associated with the particular acquisition and integration activity during these time periods. Withdrawal costs - multiemployer pension funds. During the three and six months endedJune 30, 2020 , we recorded charges to earnings of$31.6 million and$35.9 million , respectively, for withdrawal events at multiemployer pension funds to which we contribute. As we obtain updated information regarding multiemployer pension funds, the factors used in deriving our estimated withdrawal liabilities will be subject to change, which may adversely impact our reserves for withdrawal costs.Bridgeton insurance recovery. During the six months endedJune 30, 2020 , we recognized an insurance recovery of$10.8 million related to our closedBridgeton Landfill inMissouri as a reduction of remediation expenses in our cost of operations. Incremental contract startup costs - large municipal contract. Although our business regularly incurs startup costs under municipal contracts, we specifically identify in the tables above the startup costs with respect to an individual municipal contract (and do not adjust for other startup costs under other contracts). We do this because of the magnitude of the costs involved with this particular municipal contract and the unusual nature for the time period in which they were incurred. During the six months endedJune 30, 2019 , we incurred costs of$0.7 million related to the implementation of this large municipal contract. These costs did not meet the capitalization criteria prescribed by Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). Results of Operations Revenue We generate revenue primarily from our solid waste collection operations. Our remaining revenue is from other services, including transfer station, landfill disposal, recycling, and environmental services. Our residential, small-container and large-container collection operations in some markets are based on long-term contracts with municipalities. Certain of our municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as a consumer price index. We generally provide small-container and large-container collection services to customers under contracts with terms up to three years. Our transfer stations and landfills generate revenue from disposal or tipping fees charged to third parties. Our recycling processing facilities generate revenue from tipping fees charged to third parties and the sale of recycled commodities. Our revenue from environmental services consists mainly of fees we charge for disposal of non-hazardous solid and liquid waste and in-plant services, such as transportation and logistics. Environmental services waste is generated from the by-product of oil and natural gas exploration and production activity. Additionally, it is generated by the daily operations of industrial, petrochemical and refining facilities, including maintenance, plant turnarounds and capital projects. Other non-core revenue consists primarily of revenue from National Accounts, which represents the portion of revenue generated from nationwide or regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations. 32 -------------------------------------------------------------------------------- Table of Contents The following table reflects our revenue by service line for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars and as a percentage of revenue): Three Months EndedJune 30 , Six Months EndedJune 30, 2020 2019 2020 2019 Collection: Residential$ 573.6 23.4 %$ 570.1 21.9 %$ 1,142.1 22.8 %$ 1,127.5 22.2 % Small-container 742.4 30.3 792.0 30.4 1,548.1 30.9 1,570.0 30.9 Large-container 501.3 20.4 573.9 22.0 1,053.7 21.0 1,104.5 21.8 Other 12.6 0.5 11.7 0.4 24.9 0.5 22.5 0.4 Total collection 1,829.9 74.6 1,947.7 74.7 3,768.8 75.2 3,824.5 75.3 Transfer 330.5 344.7 652.4 639.6 Less: intercompany (180.4) (193.5) (366.0) (365.5) Transfer, net 150.1 6.1 151.2 5.8 286.4 5.7 274.1 5.4 Landfill 564.0 607.5 1,122.3 1,142.8 Less: intercompany (248.3) (270.1) (500.6) (508.6) Landfill, net 315.7 12.9 337.4 13.0 621.7 12.4 634.2 12.5 Environmental services 30.1 1.2 40.8 1.6 76.9 1.6 85.9 1.7 Other: Recycling processing and commodity sales 73.5 3.0 71.9 2.7 141.3 2.8 144.6 2.9 Other non-core 55.1 2.2 56.3 2.2 113.2 2.3 112.6 2.2 Total other 128.6 5.2 128.2 4.9 254.5 5.1 257.2 5.1 Total revenue$ 2,454.4 100.0 %$ 2,605.3 100.0 %$ 5,008.3 100.0 %$ 5,075.9 100.0 % The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three and six months endedJune 30, 2020 and 2019: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Average yield 2.5 % 2.8 % 2.7 % 2.9 % Fuel recovery fees (0.8) 0.1 (0.5) 0.1 Total price 1.7 2.9 2.2 3.0 Volume (1) (7.4) 0.1 (3.7) (0.7) Recycling processing and commodity sales 0.1 0.2 - - Environmental services (0.9) (0.4) (0.7) (0.2) Total internal growth (6.5) 2.8 (2.2) 2.1 Acquisitions / divestitures, net 0.7 0.7 0.9 0.5 Total (5.8) % 3.5 % (1.3) % 2.6 % Core price 4.7 % 4.6 % 5.0 % 4.7 % (1) The decrease in volume of (3.7)% during the six months endedJune 30, 2020 includes an offsetting increase of 0.2% due to one additional workday as compared to the same respective period in 2019. The decrease in volume of (0.7)% during the six months endedJune 30, 2019 includes a decrease of (0.3)% due to one less workday as compared to the same respective period in 2018. Average yield is defined as revenue growth from the change in average price per unit of service, expressed as a percentage. Core price is defined as price increases to our customers and fees, excluding fuel recovery fees, net of price decreases to retain customers. We also measure changes in average yield and core price as a percentage of related-business revenue, defined as total revenue excluding recycled commodities and fuel recovery fees, to determine the effectiveness of our pricing strategies. Average yield as a percentage of related-business revenue was 2.6% and 2.8% for the three and six months endedJune 30, 2020 , respectively, and 3.0% for the same respective periods in 2019. Core price as a percentage of related-business revenue was 4.9% and 5.2% for the three and six months endedJune 30, 2020 , respectively, and 4.9% and 5.0% for the same respective periods in 2019. 33 -------------------------------------------------------------------------------- Table of Contents During the three and six months endedJune 30, 2020 , we experienced the following changes in our revenue as compared to the same respective periods in 2019: •Average yield increased revenue by 2.5% and 2.7% during the three and six months endedJune 30, 2020 , respectively, due to price increases in all lines of business. •The fuel recovery fee program, which mitigates our exposure to increases in fuel prices, decreased revenue by (0.8)% and (0.5)% during the three and six months endedJune 30, 2020 , respectively, primarily due to a decrease in fuel prices compared to the same periods in 2019 combined with a decrease in the total revenue subject to the fuel recovery fees. •Volume decreased revenue by (7.4)% and (3.7)% during the three and six months endedJune 30, 2020 , respectively, primarily due to a reduction in service levels attributable to the COVID-19 pandemic. We experienced volume declines in our small- and large-container lines of business as a result of a reduction in the frequency of pickups or a temporary pause in service for certain of our customers. In addition, we experienced declines in solid and special waste volumes disposed at certain of our landfills and transfer stations. These decreases were partially offset by an increase in construction and demolition volumes in our landfill line of business along with one additional workday during the six months endedJune 30, 2020 as compared to the same period in 2019. •Recycling processing and commodity sales increased revenue by 0.1% during the three months endedJune 30, 2020 , primarily due to an increase in overall commodity prices as compared to the same period in 2019. Recycling processing and commodity sales remained unchanged during the six months endedJune 30, 2020 as higher commodity prices were offset by lower recycling volumes. The average price for recycled commodities, excluding glass and organics, for the three and six months endedJune 30, 2020 was$101 and$88 per ton, respectively, compared to$78 and$86 per ton for the same respective periods in 2019. Changing market demand for recycled commodities causes volatility in commodity prices. At current volumes and mix of materials, we believe a$10 per ton change in the price of recycled commodities will change both annual revenue and operating income by approximately$13 million . •Environmental services decreased revenue by (0.9)% and (0.7)% during the three and six months endedJune 30, 2020 , respectively, primarily due to a decrease in rig counts and drilling activity as a result of lower demand for crude oil and the delay of in-plant project work. •Acquisitions, net of divestitures, increased revenue by 0.7% and 0.9% during the three and six months endedJune 30, 2020 , respectively, due to our continued growth strategy of acquiring privately held solid waste, recycling and environmental services companies that complement our existing business platform. Cost of Operations Cost of operations includes labor and related benefits, which consists of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes. It also includes transfer and disposal costs representing tipping fees paid to third party disposal facilities and transfer stations; maintenance and repairs relating to our vehicles, equipment and containers, including related labor and benefit costs; transportation and subcontractor costs, which include costs for independent haulers that transport our waste to disposal facilities and costs for local operatorswho provide waste handling services associated with our National Accounts in markets outside our standard operating areas; fuel, which includes the direct cost of fuel used by our vehicles, net of fuel tax credits; disposal fees and taxes, consisting of landfill taxes, host community fees and royalties; landfill operating costs, which includes financial assurance, leachate disposal, remediation charges and other landfill maintenance costs; risk management costs, which include insurance premiums and claims; cost of goods sold, which includes material costs paid to suppliers; and other, which includes expenses such as facility operating costs, equipment rent and gains or losses on sale of assets used in our operations. 34 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the major components of our cost of operations for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars and as a percentage of revenue): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Labor and related benefits$ 514.2 21.0 %$ 551.7 21.2 %$ 1,071.1 21.4 %$ 1,088.9 21.5 % Transfer and disposal costs 189.2 7.7 221.1 8.5 387.8 7.7 418.4 8.2 Maintenance and repairs 232.2 9.5 251.0 9.6 479.5 9.6 492.8 9.7 Transportation and subcontract costs 160.7 6.5 171.8 6.6 328.0 6.5 325.6 6.4 Fuel 58.7 2.4 96.8 3.7 138.3 2.8 188.9 3.7 Disposal fees and taxes 77.2 3.1 85.0 3.3 154.6 3.1 158.2 3.1 Landfill operating costs 65.7 2.7 67.2 2.6 130.5 2.6 120.9 2.4 Risk management 51.6 2.1 63.6 2.4 113.5 2.3 116.1 2.3 Other 118.6 4.8 108.8 4.2 225.7 4.5 213.3 4.2 Subtotal 1,468.1 59.8 1,617.0 62.1 3,029.0 60.5 3,123.1 61.5 Bridgeton insurance recovery - - - - (10.8) (0.2) - - Total cost of operations$ 1,468.1 59.8 %$ 1,617.0 62.1 %$ 3,018.2 60.3 %$ 3,123.1 61.5 % These cost categories may change from time to time and may not be comparable to similarly titled categories presented by other companies. As such, you should take care when comparing our cost of operations by component to that of other companies. Our cost of operations decreased for the three and six months endedJune 30, 2020 compared to the same periods in 2019 as a result of the following: •Labor and related benefits decreased due to a decline in service levels attributable to the COVID-19 pandemic, partially offset by the minimum hourly work week guarantee for certain of our frontline employees. Additionally, this decrease was offset by higher hourly and salaried wages as a result of annual merit increases and one additional workday during the six months endedJune 30, 2020 as compared to the same period in 2019. •Transfer and disposal costs decreased as a result of lower collection volumes, partially offset by an increase in third party disposal rates. During the three and six months endedJune 30, 2020 , we internalized approximately 67% and 68%, respectively, of the total waste volume we collected. During the three and six months endedJune 30, 2019 , we internalized approximately 68% and 67%, respectively, of the total waste volume we collected. •Maintenance and repairs expense decreased due to a decrease in service levels attributable to the COVID-19 pandemic. •Transportation and subcontract costs decreased during the three months endedJune 30, 2020 primarily due to a decrease in transfer station volumes. Transportation and subcontract costs increased during the six months endedJune 30, 2020 due to acquisition-related activity along with one additional workday during the six months endedJune 30, 2020 as compared to the same period in 2019, partially offset by a decrease in transfer station volumes. •Fuel costs decreased during the three and six months endedJune 30, 2020 due to a decline in fuel prices as well as a decline in service levels attributable to the COVID-19 pandemic. Our fuel costs were further decreased by compressed natural gas (CNG) tax credits that were enacted inDecember 2019 and recognized during the three and six months endedJune 30, 2020 . The national average diesel fuel cost per gallon for the three and six months endedJune 30, 2020 was$2.43 and$2.66 , respectively, as compared to$3.12 and$3.07 for the same respective periods in 2019. At current consumption levels, we believe atwenty-cent per gallon change in the price of diesel fuel would change our fuel costs by approximately$26 million per year. Offsetting these changes in fuel expense would be changes in our fuel recovery fee charged to our customers. At current participation rates, atwenty-cent per gallon change in the price of diesel fuel changes our fuel recovery fee by approximately$26 million per year. •Landfill operating costs remained relatively unchanged during the three months endedJune 30, 2020 . Landfill operating costs increased during the six months endedJune 30, 2020 due to certain favorable remediation adjustments recorded during the six months endedJune 30, 2019 , which did not recur in 2020. •Risk management expenses decreased during the three and six months endedJune 30, 2020 primarily due to favorable actuarial development in our auto liability programs coupled with a decline in exposure in our workers compensation current year program, partially offset by an increase in premiums for our current year programs. 35 -------------------------------------------------------------------------------- Table of Contents •Other costs of operations increased during the three and six months endedJune 30, 2020 as a result of incremental business resumption costs incurred related to the COVID-19 pandemic, including costs for additional safety equipment and hygiene products, increased facility and equipment cleaning, and costs associated with our Committed to Serve initiative. •During the six months endedJune 30, 2020 , we recognized a favorable insurance recovery of$10.8 million related to our closedBridgeton Landfill as a reduction of remediation expenses in our consolidated statement of income for the applicable period. Depreciation, Amortization and Depletion of Property and Equipment The following table summarizes depreciation, amortization and depletion of property and equipment for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars and as a percentage of revenue): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Depreciation and amortization of property and equipment$ 173.1 7.1 %$ 161.0 6.2 %$ 343.9 6.9 %$ 320.4 6.3 % Landfill depletion and amortization 81.3 3.3 90.0 3.4 164.3 3.3 169.4 3.4 Depreciation, amortization and depletion expense$ 254.4 10.4 %$ 251.0 9.6 %$ 508.2 10.2 %$ 489.8 9.7 % Depreciation and amortization of property and equipment for the three and six months endedJune 30, 2020 increased primarily due to additional assets acquired with our acquisitions. During the three and six months endedJune 30, 2020 , landfill depletion and amortization expense decreased due to lower landfill disposal volumes primarily driven by decreased special waste volumes, partially offset by an increase in our overall average depletion rate. Amortization of Other Intangible Assets Expenses for amortization of other intangible assets were$5.2 million and$10.5 million , or 0.2% of revenue, for the three and six months endedJune 30, 2020 , respectively, compared to$5.0 million and$9.7 million , or 0.2% of revenue, for the same respective periods in 2019. Our other intangible assets primarily relate to customer relationships and, to a lesser extent, non-compete agreements. Amortization expense increased due to additional assets acquired with our acquisitions. Amortization of Other Assets Expenses for amortization of other assets were$9.5 million and$19.0 million , or 0.4% of revenue, for the three and six months endedJune 30, 2020 , respectively, compared to$8.2 million and$16.3 million , or 0.3% of revenue, for the same respective periods in 2019. Our other assets primarily relate to the prepayment of fees and capitalized implementation costs associated with cloud-based hosting arrangements. Accretion Expense Accretion expense was$20.8 million and$41.7 million , or 0.8% of revenue, for the three and six months endedJune 30, 2020 , respectively, compared to$20.5 million and$40.9 million , or 0.8% of revenue, for the same respective periods in 2019. Accretion expense has remained relatively unchanged as our asset retirement obligations have remained relatively consistent period over period. Selling, General and Administrative Expenses Selling, general and administrative expenses include salaries, health and welfare benefits, and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Other expenses include rent and office costs, fees for professional services provided by third parties, legal settlements, marketing, investor and community relations services, directors' and officers' insurance, general employee relocation, travel, entertainment and bank charges. Restructuring charges are excluded from selling, general and administrative expenses and are discussed separately. 36 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our selling, general and administrative expenses for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars and as a percentage of revenue): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Salaries and related benefits$ 181.0 7.4 %$ 182.5 7.0 %$ 372.4 7.5 %$ 366.7 7.2 % Provision for doubtful accounts 11.0 0.4 8.4 0.3 15.9 0.3 15.9 0.3 Other 68.3 2.8 71.7 2.7 145.3 2.9 145.8 2.9 Subtotal 260.3 10.6 262.6 10.0 533.6 10.7 528.4 10.4 Acquisition integration and deal costs 1.8 0.1 1.9 0.1 5.6 0.1 2.5 - Total selling, general and administrative expenses$ 262.1 10.7 %$ 264.5 10.1 %$ 539.2 10.8 %$ 530.9 10.4 % These cost categories may change from time to time and may not be comparable to similarly titled categories presented by other companies. As such, you should take care when comparing our selling, general and administrative expenses by cost component to those of other companies. The most significant items affecting our selling, general and administrative expenses during the three and six months endedJune 30, 2020 and 2019 are summarized below: •Salaries and related benefits decreased in aggregate dollars during the three months endedJune 30, 2020 primarily due to efficiencies at our customer resource centers attributable to our investments in enhanced technology platforms. Salaries and related benefits increased during the six months endedJune 30, 2020 primarily due to higher wages, benefits, and other payroll related items resulting from annual merit increases, partially offset by efficiencies at our customer resource centers. •Provision for doubtful accounts for the three months endedJune 30, 2020 and 2019 were$11.0 million and$8.4 million , respectively. The increase in provision for doubtful accounts is primarily due to specifically identified reserves recognized for certain of our National Accounts customers. •Other selling, general and administrative expenses decreased for the three months endedJune 30, 2020 , primarily due to a decrease in travel and advertising costs as a result of the COVID-19 pandemic. These decreases were partially offset by an increase in facility and equipment cleaning expenses attributable to the COVID-19 pandemic, consulting fees, and unfavorable changes in our legal reserves recorded during the three months endedJune 30, 2020 . •Acquisition integration and deal costs increased during the six months endedJune 30, 2020 to$5.6 million as compared to$2.5 million for the same period in 2019 due to an increase in acquisition activity. Withdrawal Costs - Multiemployer Pension Funds During the three and six months endedJune 30, 2020 , we recorded charges to earnings of$31.6 million and$35.9 million , respectively, for withdrawal events at multiemployer pension funds to which we contribute. As we obtain updated information regarding multiemployer pension funds, the factors used in deriving our estimated withdrawal liabilities will be subject to change, which may adversely impact our reserves for withdrawal costs. Loss on Business Divestitures and Impairments, Net We strive to have a number one or number two market position in each of the markets we serve, or have a clear path on how we will achieve a leading market position over time. Where we cannot establish a leading market position, or where operations are not generating acceptable returns, we may decide to divest certain assets and reallocate resources to other markets. Business divestitures could result in gains, losses or impairment charges that may be material to our results of operations in a given period. During the three and six months endedJune 30, 2020 , we recorded a net loss on business divestitures and impairments of$5.3 million and$1.4 million , respectively, which included a$10.8 million liability for a withdrawal event from a certain multi-employer pension plan. During the three and six months endedJune 30, 2019 , we recorded a net loss on business divestitures and impairments of$0.2 million and$0.5 million , respectively. Restructuring Charges In 2019, we incurred costs related to the redesign of certain back-office software systems, which continued into 2020. During the three and six months endedJune 30, 2020 , we incurred restructuring charges of$2.2 million and$6.0 million , respectively, and during the three and six months endedJune 30, 2019 , we incurred restructuring charges of$1.5 million and$4.5 million , 37 -------------------------------------------------------------------------------- Table of Contents respectively, that primarily related to these efforts. During the six months endedJune 30, 2020 and 2019, we paid$6.2 million and$6.5 million , respectively, related to these restructuring efforts. Interest Expense The following table provides the components of interest expense, including accretion of debt discounts and accretion of discounts primarily associated with environmental and risk insurance liabilities assumed in acquisitions, for the three and six months endedJune 30, 2020 and 2019 (in millions of dollars): Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Interest expense on debt$ 76.9 $ 87.6 $ 159.3 $ 177.6 Non-cash interest 16.0 12.3 30.9 23.3 Less: capitalized interest (1.3) (1.4) (2.0) (2.0) Total interest expense$ 91.6 $ 98.5 $ 188.2 $ 198.9 Total interest expense for the three and six months endedJune 30, 2020 decreased primarily due to lower interest rates on our floating and fixed rate debt. The decrease attributable to our fixed rate debt is primarily due to the issuance of$600.0 million of 2.300% senior notes and$400.0 million of 3.050% senior notes inFebruary 2020 as well as the issuance of$900.0 million of 2.500% senior notes inAugust 2019 , which were used to repay outstanding senior notes with coupons ranging from 5.000% to 5.500%. This decrease was partially offset by the change in fair value of certain derivative contracts, which was recorded as an adjustment to interest expense, as well as an increase in variable lease costs related to certain of our finance leases. For additional discussion and detail regarding our derivative contracts, see the Financial Condition discussion of this Management's Discussion and Analysis of Financial Condition and Results of Operations. Cash paid for interest, excluding net swap settlements for our fixed-to-floating interest rate swaps, was$166.9 million and$171.1 million for the six months endedJune 30, 2020 and 2019, respectively. Income Taxes Our effective tax rate, exclusive of non-controlling interests, for the three and six months endedJune 30, 2020 was 24.7% and 24.1%, respectively. Our effective tax rate, exclusive of non-controlling interests, for the three and six months endedJune 30, 2019 was 23.6% and 24.3%, respectively. Cash paid for income taxes was$6.6 million for the six months endedJune 30, 2020 and a net refund of$10.5 million for the same period in 2019. The net refund received for the six months endedJune 30, 2019 was favorably impacted from the receipt of funds from amended tax returns filed during 2018. For additional discussion and detail regarding our income taxes, see Note 8, Income Taxes, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Reportable Segments Our senior management evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2. Group 1 primarily consists of geographic areas located in the westernUnited States , and Group 2 primarily consists of geographic areas located in the southeastern and mid-westernUnited States , and the eastern seaboard ofthe United States . 38 -------------------------------------------------------------------------------- Table of Contents The two field groups, Group 1 and Group 2, are presented below as our reportable segments, which provide integrated waste management services consisting of non-hazardous solid waste collection, transfer, recycling, disposal and environmental services. Summarized financial information concerning our reportable segments for the three and six months endedJune 30, 2020 and 2019 is shown in the following tables (in millions of dollars and as a percentage of revenue in the case of operating margin): Depreciation, Amortization, Depletion and Accretion Adjustments to Loss on Before Amortization Business Adjustments for Expense for Depreciation, Divestitures Asset Asset Amortization, and Retirement Retirement Depletion and Impairments, Operating Net Revenue Obligations Obligations Accretion Net Income
(Loss) Operating Margin
Three Months EndedJune 30, 2020 Group 1$ 1,230.1 $ 130.8 $ - $ 130.8 $ -$ 318.5 25.9 % Group 2 1,184.8 133.9 (1.5) 132.4 - 225.6 19.0 % Corporate entities 39.5 26.7 - 26.7 5.3 (148.9) - Total$ 2,454.4 $ 291.4 $ (1.5) $ 289.9$ 5.3 $ 395.2 16.1 % Three Months EndedJune 30, 2019 Group 1$ 1,264.4 $ 127.1 $ (0.2) $ 126.9 $ -$ 309.2 24.5 % Group 2 1,303.0 131.9 0.6 132.5 - 228.0 17.5 % Corporate entities 37.9 25.3 - 25.3 0.2 (99.8) - Total$ 2,605.3 $ 284.3 $ 0.4 $ 284.7$ 0.2 $ 437.4 16.8 % Depreciation, Amortization, Depletion and Accretion Adjustments to Loss on Before Amortization Business Adjustments for Expense for Depreciation, Divestitures Asset Asset Amortization, and Retirement Retirement Depletion and Impairments, Operating Net Revenue Obligations Obligations Accretion Net Income (Loss) Operating Margin Six Months EndedJune 30, 2020 Group 1$ 2,484.7 $ 259.5 $ (0.2) $ 259.3 $ -$ 630.3 25.4 % Group 2 2,443.3 268.5 (1.6) 266.9 - 460.0 18.8 % Corporate entities 80.3 53.2 - 53.2 1.4 (262.1) - Total$ 5,008.3 $ 581.2 $ (1.8) $ 579.4$ 1.4 $ 828.2 16.5 % Six Months EndedJune 30, 2019 Group 1$ 2,457.7 $ 248.7 $ (0.3) $ 248.4 $ -$ 597.5 24.3 % Group 2 2,542.7 257.9 0.6 258.5 - 451.3 17.7 % Corporate entities 75.5 49.8 - 49.8 0.5 (188.6) - Total$ 5,075.9 $ 556.4 $ 0.3 $ 556.7$ 0.5 $ 860.2 17.0 % Corporate entities include legal, tax, treasury, information technology, risk management, human resources, closed landfills and other administrative functions. National Accounts revenue included in corporate entities represents the portion of revenue generated from nationwide and regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations. 39 -------------------------------------------------------------------------------- Table of Contents Significant changes in the revenue and operating margins of our reportable segments comparing the three and six months endedJune 30, 2020 with the same periods in 2019 are discussed below: Group 1 Revenue for the three months endedJune 30, 2020 decreased 2.7% due to volume declines in our small- and large-container collection, transfer station, and landfill lines of business, partially offset by an increase in average yield in all lines of business. Revenue for the six months endedJune 30, 2020 increased 1.1% due to an increase in average yield in all lines of business and one additional workday as compared to the same periods in 2019. This increase was partially offset by volume declines in our small- and large-container collection, transfer station, and landfill lines of business. Operating income in Group 1 increased from$309.2 million for the three months endedJune 30, 2019 , or a 24.5% operating income margin, to$318.5 million for the three months endedJune 30, 2020 , or a 25.9% operating income margin. Operating income in Group 1 increased from$597.5 million for the six months endedJune 30, 2019 , or a 24.3% operating income margin, to$630.3 million for the six months endedJune 30, 2020 , or a 25.4% operating income margin. The following cost categories impacted operating income margin: •Cost of operations favorably impacted operating income margin for the three and six months endedJune 30, 2020 , primarily due to a decrease in labor and related benefits, maintenance and repairs expenses, and fuel costs as a result of decreased service levels attributable to the COVID-19 pandemic. Fuel costs were further decreased as a result of a decline in diesel fuel prices combined with CNG tax credits that were enacted inDecember 2019 and recognized during the three and six months endedJune 30, 2020 . •Landfill and depletion favorably impacted operating income margin during the three and six months endedJune 30, 2020 due to lower landfill disposal volumes primarily driven by decreased special waste volumes, partially offset by an increase in our overall average depletion rate. Depreciation unfavorably impacted operating income margin for the three and six months endedJune 30, 2020 , primarily due to additional assets acquired with our acquisitions. Group 2 Revenue for the three and six months endedJune 30, 2020 decreased 9.1% and 3.9%, respectively, due to a decrease in overall volumes across all lines of business, partially offset by an increase in average yield in all lines of business and one additional workday during the six months endedJune 30, 2020 , as compared to the same period in 2019. Operating income in Group 2 decreased from$228.0 million for the three months endedJune 30, 2019 , or a 17.5% operating income margin, to$225.6 million for the three months endedJune 30, 2020 , or a 19.0% operating income margin. Operating income in Group 2 increased from$451.3 million for the six months endedJune 30, 2019 , or a 17.7% operating income margin, to$460.0 million for the six months endedJune 30, 2020 , or an 18.8% operating income margin. The following cost categories impacted operating income margin: •Cost of operations favorably impacted operating income margin for the three and six months endedJune 30, 2020 , primarily due to a decrease in labor and related benefits, transfer and disposal costs, maintenance and repairs expenses, and fuel costs as a result of decreased service levels attributable to the COVID-19 pandemic. Fuel costs were further decreased as a result of a decline in diesel fuel prices combined with CNG tax credits that were enacted inDecember 2019 and recognized during the three and six months endedJune 30, 2020 . These decreases were partially offset by an increase in transportation and subcontract costs and landfill operating costs, both as a percentage of revenue. •Landfill depletion and amortization unfavorably impacted operating income margin for the three and six months endedJune 30, 2020 due to an increase in our overall average depletion rate, partially offset by lower landfill disposal volumes primarily driven by decreased special waste volumes. Depreciation unfavorably impacted operating income margin during the three and six months endedJune 30, 2020 , primarily due to additional assets acquired with our acquisitions. Corporate Entities Operating loss in our Corporate Entities increased from$99.8 million for the three months endedJune 30, 2019 to$148.9 million for the three months endedJune 30, 2020 . Operating loss in our Corporate Entities increased from$188.6 million for the six months endedJune 30, 2019 to$262.1 million for the six months endedJune 30, 2020 . The operating loss for the three and six months endedJune 30, 2020 was unfavorably impacted by net unfavorable legal settlements and a net loss on business divestitures and impairments, partially offset by favorable actuarial development in our auto liability programs recorded during the three months endedJune 30, 2020 . Additionally, during the six months endedJune 30, 2020 , we recognized incremental business resumption costs related to the COVID-19 pandemic as selling, general and administrative expenses. We recognized certain direct and incremental costs attributable to the COVID-19 pandemic, including costs for additional safety equipment and hygiene products, increased facility and equipment cleaning, and costs associated with our Committed to Serve initiative. 40 -------------------------------------------------------------------------------- Table of Contents Landfill and Environmental Matters Available Airspace As ofJune 30, 2020 , we owned or operated 190 active solid waste landfills with total available disposal capacity estimated to be 5.0 billion in-place cubic yards. For these landfills, the following table reflects changes in capacity and remaining capacity, as measured in cubic yards of airspace: Permits Granted / Changes in Balance as of New Expansions New Sites, Airspace Engineering Balance as of December 31, 2019 Undertaken Net of Closures Consumed Estimates June 30, 2020 Cubic yards (in millions): Permitted airspace 4,673.0 - 88.7 (37.6) (0.2) 4,723.9 Probable expansion airspace 321.7 30.0 (82.3) - - 269.4 Total cubic yards (in millions) 4,994.7 30.0 6.4 (37.6) (0.2) 4,993.3 Number of sites: Permitted airspace 189 - 1 190 Probable expansion airspace 12 2 (2) 12 Total available disposal capacity represents the sum of estimated permitted airspace plus an estimate of probable expansion airspace. Engineers develop these estimates at least annually using information provided by annual aerial surveys. Before airspace included in an expansion area is determined to be probable expansion airspace and, therefore, included in our calculation of total available disposal capacity, it must meet all of our expansion criteria. As ofJune 30, 2020 , 12 of our landfills met all of our criteria for including their probable expansion airspace in their total available disposal capacity. At projected annual volumes, these landfills have an estimated remaining average site life of 126 years, including probable expansion airspace. The average estimated remaining life of all of our landfills is 62 years. We have other expansion opportunities that are not included in our total available airspace because they do not meet all of our criteria for treatment as probable expansion airspace. Remediation and Other Charges for Landfill Matters It is reasonably possible that we will need to adjust our accrued landfill and environmental liabilities to reflect the effects of new or additional information, to the extent that such information impacts the costs, timing or duration of the required actions. Future changes in our estimates of the costs, timing or duration of the required actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows. For a description of our significant remediation matters, see Note 6, Landfill and Environmental Costs, of the notes to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 41
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